2008 (7) TMI 1027 - HC - Income Tax

Disallowance of expenses - Addition on unexplained cash credit - Disallowance on account of credit in respect of loan from Sit. Chanchal Lamba - Ad hoc disallowance of expenditure - Disallowance of l/10th of car expenses - Disallowance of depreciation. Addition on unexplained cash credit - identity of the creditors genuineness of the transactions and the sources for making the credits not established - HELD THAT - The department has not brought any material on record to doubt the identity of the creditors who have filed their confirmatory letters which have been reproduced hereinabove. In view of these details found on record there remains no stock of doubting the genuineness of transactions of credits. On going through the assessment order it appears that the AO has raised suspicion only on those grounds which are not based on any material - Therefore we are of the considered opinion that the assessee has successfully discharged its burden in proving the identity of the creditors; genuineness of the transactions of credit and the source of the credits. We are therefore unable to concur with the findings of the learned CIT(a) and set aside the same. Consequently ground No.1 taken by the assessee stands allowed and the addition made by the AO and sustained by the learned CIT(A) is deleted. Disallowance on account of credit in respect of loan from Sit. Chanchal Lamba - HELD THAT - The departmental authorities have doubted the genuineness of the transactions by making surmises and conjectures which cannot be justified. The departmental authorities have also gone the test of human probabilities. However no doubt can be raised about the genuineness of the transaction on the basis of probabilities and improbabilities - Merely because GPF advance was taken for purposes of marriage but was diverted for making advance of loan it cannot be said that the transaction of advancing loan was not genuine. The creditor is an employee and she might have indulged in misconduct in utilizing the sanctioned amount for the purpose for which it was not sanctioned but for that action could have been taken against her by the department if it was so considered - In any case merely on that basis the genuineness of the transaction cannot be doubted. Thus we are unable to concur with the findings of the learned CIT(A) in relation to this credit also. Hence setting aside the order of the learned CIT(A) we allow ground No.2 in favour of the assessee. Consequently the addition made by the AO and sustained by the learned CIT(A) is deleted. Ad hoc disallowance of expenditure - AO proceeded to make disallowance without assigning cogent reasons - HELD THAT - After having examined the books of account and vouchers AO has not pointed out any specific instance to show as to why the expenditure was not allowable. The learned CIT(A) has also not appreciated this aspect properly - Therefore the ad hoc disallowance of expenditure without pointing out and justifying the reasons for doing so cannot be upheld. We therefore set aside the findings of the learned CIT(A) and delete the addition. This ground stands allowed in favour of the assessee. Disallowance of l/10th of car expenses - HELD THAT - This disallowance is also justified on the ground of personal use of the vehicle. This disallowance is therefore upheld. Disallowance of depreciation - AO allowed l/6th of it - HELD THAT - In appeal the learned CIT(A) restricted the disallowance to 1/10th Car depreciation cannot be disallowed on the ground of persona user of the car. The departmental authorities were therefore not justified in disallowing any portion out of car depreciation. Our this view is supported by the decision in the case of Mukesh K. Shali vs. ITO 2004 (5) TMI 530 - ITAT MUMBAI . This ground is therefore partly allowed. In the result the appeal is partly allowed.

Issues Involved:
1. Sustenance of addition of Rs. 10,60,000 on account of unexplained cash credit.
2. Sustenance of disallowance of Rs. 3,00,000 on account of credit from Smt. Chanchal Lamba.
3. Sustenance of addition of Rs. 1,00,000 on account of various expenses.
4. Disallowance of 1/10th of telephone expenses.
5. Disallowance of 1/10th of car expenses and car depreciation.

Issue-wise Detailed Analysis:

1. Sustenance of Addition of Rs. 10,60,000 on Account of Unexplained Cash Credit:
The assessee, a partnership firm engaged in manufacturing hand pumps, declared an income of Rs. 59,130 for the assessment year 2001-02. During scrutiny, the Assessing Officer (AO) found loans amounting to Rs. 25 lacs from three ladies, which were doubted due to the creditors' age and lack of SEBI registration of brokers involved. The AO added Rs. 10,60,000 as unexplained cash credits under section 68, which the Commissioner of Income-tax (Appeals) [CIT(A)] upheld. The assessee provided confirmations, tax returns, and bank statements, proving the identity and genuineness of the transactions. The Tribunal found the documentary evidence sufficient to establish the identity, genuineness, and source of credits, thus deleting the addition of Rs. 10,60,000.

2. Sustenance of Disallowance of Rs. 3,00,000 on Account of Credit from Smt. Chanchal Lamba:
The AO found a loan of Rs. 3 lacs from Smt. Chanchal Lamba, doubting its genuineness due to non-utilization of GPF loan for the intended purpose and non-appearance of Smt. Lamba. The CIT(A) upheld the AO's decision. The assessee provided confirmation letters, sanction letters for GPF, and bank statements showing sufficient funds. The Tribunal found the documentary evidence sufficient to establish the identity and genuineness of the transaction, thus deleting the addition of Rs. 3,00,000.

3. Sustenance of Addition of Rs. 1,00,000 on Account of Various Expenses:
The AO disallowed Rs. 1,00,000 due to a disproportionate increase in expenses compared to the previous year, supported by self-made vouchers. The CIT(A) upheld this disallowance. The assessee argued that all expenses were verifiable and supported by vouchers. The Tribunal found that the AO did not provide specific instances of unverifiable expenses, thus deleting the addition of Rs. 1,00,000.

4. Disallowance of 1/10th of Telephone Expenses:
The AO disallowed 1/6th of telephone expenses for personal use, which the CIT(A) reduced to 1/10th. The Tribunal upheld this disallowance, acknowledging the likelihood of personal use.

5. Disallowance of 1/10th of Car Expenses and Car Depreciation:
The AO disallowed 1/6th of car expenses for personal use, which the CIT(A) reduced to 1/10th. The Tribunal upheld the disallowance of car expenses but deleted the disallowance of car depreciation, citing that personal use does not justify disallowing depreciation.

Conclusion:
The appeal was partly allowed, with the Tribunal deleting the additions of Rs. 10,60,000 and Rs. 3,00,000, and the disallowance of Rs. 1,00,000 for various expenses. The disallowance of 1/10th of telephone and car expenses was upheld, but the disallowance of car depreciation was deleted.

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